Articles Posted in Non-Compete Agreement / Covenant Not to Compete

Unemployment benefits were designed to help those who lose their job through no fault of their own. As a result, most employers don’t expect former workers who resign their position to receive unemployment benefits, but a Missouri appellate court recently ruled that, in some instances, an employee who resigns can do just that.

The case that prompted the ruling was David Darr, a former life-insurance salesperson for Robertsville Marketing Group, based in Wentzville, MO. A few months after Darr began working for Robertsville, the company sent out a notice to all of the employees, telling them they would be required to sign a non-compete agreement as a condition of continued employment with the company. Continue reading ›

Non-compete agreements have been in use in the top tiers of American companies for several years now. The idea is to protect the interests of the company by making sure that executives or other employees with trade secrets and confidential information  don’t take those secrets to a competitor, where they can be used against the company. Non-compete agreements began in the big tech companies, where keeping the company’s latest developments was of the utmost importance in order for the company to be able to effectively compete in the marketplace.

Non-compete agreements impose restrictions on when and where an employee can work after leaving the company. Usually, the employee cannot go to work for a direct competitor within a certain reasonable geographical radius of the company and within a certain reasonable time frame after leaving the company. This means that an employee is generally allowed to go work for a company’s competitor, only if the competitor is located in a different city or state from the company. Often, employees can work for whomever they want wherever they want within six months to a year after leaving the company. The lag time is usually sufficient to render useless any trade secrets the employee might have.

For executives or employees who are working with trade secrets, helping to develop new products for the company, etc., it may makes sense that the company would want to protect their investment by preventing those employees from going to work for a competitor. It does not make sense for companies to require hourly employees making sandwiches to sign a non-compete agreement, yet that is allegedly the case for certain Jimmy John’s employees.

It is hard to believe that the people making sandwiches, on the bottom rung of the proverbial ladder, have any valuable trade secrets that Jimmy John’s would not want shared. Other cases of hourly, minimum-wage employees have been reported, but it is rare for a company to enforce the non-compete agreements of these employees. Jimmy John’s, on the other hand, according to the New York Times has allegedly taken steps to actively restrict the alternate employment options of its sandwich makers.  The Time’s blog does say that there is no reported case of Jimmy John’s actually seeking to enforce this provision.

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Non-disclosure agreements exist so that companies can safely have discussions about developing ideas of technology without worrying about one company stealing the trade secrets of another. However, the language involved in the non-disclosure agreement is crucial. The line between what information is confidential and what information is not confidential must be clearly defined. When a company lays out the parameters for confidential information in their non-disclosure agreement, it is advisable that the company then be sure to work within the parameters which they have set.

One company that ran into trouble with the definition of confidential information as laid out in their own non-disclosure agreement is Convolve. Beginning in the late 1990’s, Convolve and Compaq Computers began doing business together using non-disclosure agreements. Those agreements specified that confidential information was to be defined as any information which was marked as confidential at the time that it was disclosed. If it was unmarked, or if the information was disclosed in a presentation, then it had to be designated as confidential in a written memorandum following the disclosure.

In late 1999, Convolve made certain presentations to Compaq regarding computer hard-drive technology, but the two companies never reached a licensing agreement for the technology. When Company then went on to use some of the information which they had gleaned from those presentations, Convolve sued Compaq for breach of contract. However, the presentations at issue were never followed by written memos to confirm that the information presented was confidential. The lower court ruled that, without the necessary memos, as laid out in the non-disclosure agreement, the agreement did not apply to any information which was disclosed in those presentations. The court decided that the non-disclosure agreements “do not appear reasonably susceptible to the interpretation Convolve urges.”

Convolve appealed the decision, arguing that, despite the lack of written memos, Compaq had understood that all of their disclosures were confidential. The appellate court rejected this argument, pointing out that it contradicted the terms of the non-disclosure agreement.
Convolve then tried to argue that, regardless of the non-disclosure agreement, state confidentiality law still applied. The appellate court also rejected that argument, stating that a non-disclosure agreement replaced any implied duty of confidentiality which might have existed between the two companies under the law. According to the Court, Convolve could not force their business partners to abide by one set of rules as laid out in their non-disclosure agreement while simultaneously forcing them to abide by a different set of rules under the law. The Court stated that “One party should not be able to circumvent its contractual obligations or impose new ones over the other via some implied duty of confidentiality.”

The Court therefore ruled in favor of Compaq, having decided that “Convolve did not follow the procedures set forth in the NDA to protect the shared information, so no duty ever arose to maintain secrecy of that information.”

The lesson learned here is that, if you are going to specifically define confidential information in your non-disclosure agreement, you should be careful to abide by all the terms of your own contract if you wish for your information to remain safe.

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As this blog has discussed, non-compete agreements have become increasingly prevalent in recent years. However, they have also grown in severity in some companies, such that they frequently impose undue hardship on an employee’s search for future employment. As a result, courts in some states have grown increasingly unfavorable towards non-compete agreements. California courts, for example, are hard pressed to enforce any non-compete agreements.

If an employee breaches a non-compete agreement, the former employer can take the employee to court for breach of contract, but these lawsuits can be long and costly. While employees often rely on the allegation that the non-compete agreement imposed undue hardship, many courts rely on a three-pronged system to determine the validity of a non-compete agreement, of which undue hardship is only one consideration.

Completing the test of validity therefore requires the court to consider all the facts of the case. This can lead to very lengthy discovery, making the lawsuit even more costly. After all that, there is never a guarantee that a court will rule in the company’s favor, and even if they do, a customer lost is unlikely to come back.

For these reasons, alternatives to non-compete agreements have been proposed, although they still have yet to achieve the same popularity in American businesses. The first alternative is garden leave contracts. In these agreements, the employee agrees to give the employer notice of a certain amount of time before leaving the company. This is what is known as the garden leave period, but the employer continues the pay the employee a salary during this period. Garden leave contracts have two advantages over non-compete agreements:

1) If an employee fails to abide by the agreement it would not only prove breach of contract but also break the common law of duty of loyalty. In this case, an employer would not only be able to collect on salary paid during this period, but might be able to recover punitive damages as well.

2) It undercuts one of the main defenses that employees use when they breach their non-compete agreements: undue hardship. When an employee is still receiving a salary, undue hardship becomes significantly more difficult to prove.

As with non-compete agreements, the length of the garden leave period must be reasonable. Also, while it might be tempting for employers to reduce garden leave pay to a percentage of the employee’s normal salary, such a reduction risks inviting a court to apply higher scrutiny to the clause, which leads to the possibility of the court dismissing the agreement as invalid.

Another option is to replace the non-compete agreement with a safety net payment. Safety net payments are similar to garden leave agreements with the main difference of applying after the employee and employer have broken off all relations with one another. Once payment is made, the employee agrees to refrain from certain competitive actions, such as contacting specified customers. In this case, the safety net payment does the same thing as the garden leave payment does as far as ensuring that an employee cannot claim that the contract imposes undue hardship in their search for new employment.

Some companies have chosen to make payments like this staggered over a certain period of time, such as six months or one year. If the employee breaches the contract, the employer can then stop future installments of the safety net pay. However, employers must be careful to specify in the contract that a breach on the part of the employee will result in termination of all future payments. Otherwise, the cessation of installments could result in the employer getting taken to court for breach of contract.

The third and final alternative to non-compete agreements is client purchase agreements. These agreements do not expressly prohibit competition, but they do enact punishment in the event that the competition happens. In these arrangements, an employee agrees to pay the employer if she chooses to participate in certain competitive behaviors, such as by working with specified customers.

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As the popularity of covenants not to compete increases, the competitive practices which are prohibited by those agreements also seem to grow. However, there are laws in place which ensure that covenants not to compete that are deemed too stringent cannot be upheld in a court of law. One of the most common limitations on covenants not to compete is the one which states that the agreement must be broad enough only to cover the company’s legitimate business interests and no more.

Another very common limitation that courts consider is whether or not the agreement poses undue hardship on an employee. When cases of disputed covenants not to compete reach a court, it is the court’s duty to balance the needs of the business to protect their legitimate business interests with the needs of the employee to find work. If a covenant not to compete is too broad, it may make it inordinately difficult for an employee to find any work at all after her employment with the company comes to an end.

One such case in which a court found that the covenant not to compete was overly broad is the case of Orca Communications Unlimited LLC v. Ann J. Noder et al. In this case, Orca Communications, a public relations firm located in Arizona, hired Noder to be its President. Prior to taking this job, Noder had had no experience with public relations. She learned everything about the business while working for Orca.

Noder signed a Confidentiality, Customer and Employee Non-Solicitation, and Non-Competition Agreement which prevented her from advertising, or soliciting or providing conflicting services for any company which competes with Orca. After Noder left Orca to start her own public relations firm, Orca sued her for breach of contract.

The Agreement further prevented Noder from convincing any former or current or prospective customer of Orca to end its relationship with Orca. This was one of the main areas of Agreement with which the court took issue. To prevent Noder from enticing away from Orca a current Orca customer is to protect Orca’s legitimate business interests. However, to prevent Noder from doing so with companies which have never had any business dealings with Orca, the court found to be overly broad and imposed undue hardship on Noder in her efforts to find gainful employment after her time at Orca.
The Agreement also contained a confidentiality provision which prohibited Noder from using or disclosing any of Orca’s confidential information without Orca’s consent. “Confidential Information” was defined as knowledge or information which is not generally known to the public or to the public relations industry or was “readily accessible to the public in a written publication.” However, the Agreement did cover information which was only available through “substantial searching of published literature” or that had been “pieced together” from a number of different publications and sources.

This provision of the Agreement the court also found to be too broad. To protect company trade secrets is well within the limitations of protecting a company’s legitimate business interests. However, even if one has to conduct substantial research to gain knowledge, that knowledge is still considered to be in the public domain and therefore cannot be covered under a confidentiality agreement.

The trial court found that the Agreement was overly broad and dismissed the case. Orca appealed and the Arizona Court of Appeals upheld the ruling of the lower court and dismissed the case.

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As of late, employers have been using non-compete provisions in their contracts with their employees with increasing frequency. A non-compete provision is part of a contract which prohibits a worker from going to work for a competitor of the employer after they leave the company’s employment. These provisions usually include a geographic radius and a time frame after termination of employment. Such provisions were initially used most often in tech companies, such as Apple and Google, who were afraid of employees taking trade secrets to their competitors. However, non-compete provisions have spread throughout the job market to include more and more positions in more and more companies.

Most recently, a college football coach, Bret Bielma, signed an employment contract with the University of Arkansas which included a Covenant Not to Compete. Having had a long and very successful career as the football coach at the University of Wisconsin, many people in the industry were surprised to see Bielma leave Wisconsin for Arkansas. However, college sports are becoming increasingly similar to their professional counterparts in the way that they compete for coaches and athletes. No doubt, the multi-million dollar contract that Arkansas offered Bielma played a role in his decision to change employers.

What was unusual about Bielma’s contract with the University of Arkansas was the Covenant Not to Compete which was included. It states that Bielma is not to coach another football team in the Southeastern Conference (SEC), in which Arkansas competes. The time limit on the non-compete is only as long as the coach’s contract with the University of Arkansas lasts: from December 4, 2012 to December 31, 2018. After that date, Bielma is free to coach any football team that he wants.

The contract points out that the University of Arkansas has a vested interest in Bielma’s coaching and that its legitimate business interests would be in jeopardy without this provision in Bielma’s contract. The agreement states, “The parties … agree that the competitiveness and success of the University’s football program affects the overall financial health and welfare of the Athletic Department and that the University maintains a vested interest in sustaining and protecting the well-being of its football program”. The contract further states that, “Coach understands and agrees that without such protection, the University’s interests would be irreparably harmed.”

The non-compete provision also gives Bielma relief from its restrictions in the event that his contract is prematurely terminated. According to the contract, “This covenant not to compete, however, shall not apply if the University exercises its right to terminate the Agreement for convenience or if the Coach terminates this Agreement for cause based upon the University’s material breach of this Agreement.”

The inclusion of a covenant not to compete illustrates the further broadening of non-compete contracts into a variety of industries. The University of Arkansas, like many other institutions, is trying to protect the substantial investment it has made in its football coach. This non-compete agreement provides the University of Alabama with preventive measures from Bielma abandoning them to coach a competing football team, as well as substantial leverage against any other university in the SEC that might want to lure Bielma away from Arkansas.

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In recent years, courts have largely been ruling against employers in cases of disputed non-compete agreements. A non-compete agreement is a provision in an employment agreement which states that the employee, after leaving the employer, will not compete with the employer for business within a certain time frame and a certain geographical radius of the employer. Such provisions are intended to protect the employer but many of them have lately begun to stretch the bounds of what is reasonable, making it increasingly difficult for the employee to find another job.

In one such dispute over a non-compete agreement, John Malyevac signed an employment agreement with Assurance Data, which included a non-compete provision. The provision stated that, after termination with the company, Malyevac would not compete with Assurance Data within a fifty-mile radius of its headquarters for a duration of “twelve (12) [sic] after the date of termination.” After Malyevac left his employment with Assurance Data and went to work for another company, Assurance Data sued Malyevac for alleged breach of employment contract.

Malyevac filed a demurrer to the complaint, saying that it failed to state a claim upon which relief could be granted. A demurrer, also known in most courts as a motion to dismiss, is when the defendant asks the court to dismiss the case based solely on the allegations given in the complaint, rather than the actual facts. Malyevac also claimed that the non-compete agreement was too broad and therefore unenforceable. For example, he pointed out, the provision of prohibiting the employee from soliciting for customers for “twelve (12) [sic] after the date of termination” does not say whether that applies to days, weeks, months, or years. Six to twelve months is a common duration for these types of agreements, but without specifically saying so in the agreement, it would be difficult for a court to uphold.

Assurance Data argued that the court could not decide how enforceable the non-compete agreement is on demurrer, because doing so would deny the company the opportunity to present evidence that the restraints of the agreement are reasonable and necessary to protect its legitimate business interests. The Fairfax County Circuit Court ruled in favor of Malyevac and sustained the demurrer without leave to amend. Assurance Data appealed the ruling.

The Virginia Supreme Court, however, disagreed, saying that the enforceability of non-compete agreements must be determined on a case-by-case basis “balancing the provisions of the contract with the circumstances of the businesses and employees involved.” The court agreed with Assurance Data that, in cases of disputed non-compete agreements, it is the responsibility of the employer to provide evidence that the scope of the agreement is no more than that which is necessary to protect the legitimate business interests of the employer. Such a determination can only be made after considering three elements of the non-compete agreement: 1) how the agreement would restrict the employee’s job functions; 2) the geographic scope of the restriction; and 3) the duration of the restriction.

The ruling is significant for both employers and employees. Although the current court ruling is in favor of the employer, such favor is conditional upon the employer’s ability to provide sufficient evidence that the scope of its non-compete provision was indeed necessary to protect its business interests. Employers may want to take extra care in the future to ensure that their non-compete provisions cover only what is necessary to protect them and no more. The ruling is also significant for employees who may want to take a closer look at their employment agreements before signing.

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This blog has already discussed new litigation and recent cases regarding non-compete agreements. It may already be obvious that more and more of these cases are being decided in favor of the defendants. Another such case has recently had its time in court and, once again, the defendant came out on top.

In the lawsuit, Dr. William Yates went to work for Bosley Medical Group, a hair replacement clinic in Illinois’s Cook County. When he began working for them as an independent contractor in 2005, Dr. Yates had no apparent experience with hair restoration. According to his employment agreement, Bosley was to invest in teaching Dr. Yates the “highly specialized practice of hair restoration”. According to the complaint, Bosley invested more than $200,000 in Yates’s training. In 2012, Dr. Yates went to work for Ziering Medical, a rival hair replacement clinic located in DuPage County.

The crux of the case rested on the matter of geography. Apparently, as it is written, the non-compete agreement could have been interpreted two ways: 1) that the non-compete was limited to Cook County, or 2) that Dr. Yates could not work for a rival of Bosley’s anywhere in the United States, Canada, or Mexico. Paragraph 32 of the non-compete agreement states that, after termination of his employment with Bosley, “[F]or a period of two years thereafter, [Dr. Yates and WDY] shall not directly or indirectly compete with BMG or any of its affiliates … in hair restoration, including but not limited to hair transplantation and scalp reduction and related procedures, within the geographic marketing areas of [Bosley and its affiliates], namely any county (or counties, as defined below), in which [Bosley or its affiliates] then maintains an office.”

In their arguments, the attorneys for Bosley chose the interpretation which focused on counties. Although Dr. Yates was not technically worked in Cook County after he left Bosley, the plaintiffs argued that he was competing for clients in the Chicago area and that Ziering Medical advertises in Cook County. According to Bosley’s argument, advertising in Cook County was sufficient to violate the non-compete agreement. The Court rejected this argument, stating that

“Paragraph 32 of the Agreement does not prohibit Dr. Yates from providing hair restoration services in DuPage County. Bosley is located in Chicago. The Agreement is clear that this bars Dr. Yates from competing with Bosely in Cook County only. … Bosley’s allegation of breach of Paragraph 32 of the Agreement is based solely on advertising by Ziering in the Chicago Tribune and on its website. Such advertisements are not a breach of Paragraph 32.”

When Bosley pointed out that he should have the right to protect his investment in Yates’s training, the Court agreed with him, but only up to a point. In the end, it all came back to geography and the Court determined that the non-compete had not been violated. The Court stated in its Decision that “Bosley does not allege that Dr. Yates has directly or indirectly provided hair restoration services in Cook County. Bosley could have also barred competition in the counties surrounding Cook County as it did for other metropolitan areas where it maintains surgical offices, but did not do so. Bosley also could have barred marketing to prospective customers in Cook County by Dr. Yates, but did not do so by the language of Paragraph 32. Bosley is asking this court to construe Paragraph 32 liberally in favor of restraint but this court is required to construe Paragraph 32 narrowly in favor of natural rights.”

The Court granted the defendants’ motions to dismiss with prejudice.

You can view the full opinion of the court’s decision here
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Non-compete agreements have become fairly common, especially for those working in the technology field. Many companies are afraid that their employees will leave and take trade secrets and/or customers to their competitors. To prevent this from occurring, most employers require their employees to sign non-compete agreements as a condition of employment. Other times employers will sometimes have an employee sign such an agreement after she has already started working for the company, but in certain states, that requires some sort of additional compensation for the employee, such as a bonus, in order to make it binding. A non-compete agreement usually states that an employee will not work for any of the company’s competitors within a certain time frame after their employment with the company has ended. The time frame is generally for a year or two and there is normally a geographical component as well, most often prohibiting the employee from working for a competitor in the same state or county as the company.

Employees often sign these agreements thinking that they have no choice if they want the job. Or maybe they can’t think of a reason they would leave their current employer to work for a competitor. The latter plan might work out just fine for some people but for others, particularly in this economy, all it takes is a downsizing and suddenly these happy employees find themselves without a job and working for a competitor may be their only option.

While more and more courts lately have been siding with the defendants in lawsuits regarding non-compete agreements, many employees are still hesitant to leave their current employer. The idea of a lawsuit can be intimidating, especially knowing that lawsuits can be expensive and the company has much greater resources at their disposal than the employee to devote to fighting a legal battle. It’s also a sensitive area because, when a non-compete agreement is violated, the new employer is often also listed as a defendant. An employee trying to find work will not want to get their new employer in trouble. At the very least, the prospect of getting sued will make them a less desirable candidate to the new employer.

There are ways around these non-compete agreements and discussing options with a non-compete attorney is a great place to start. Many non-compete attorneys will tell you that the first step is always to talk to the current or former employer to see if they can adjust the non-compete agreement to create narrower definitions. Ideally, the result would still protect the employer while giving the employee the freedom she needs to make a living. Many companies aren’t even aware of how their own non-compete agreements are drafted. All they know is that they don’t want their employees to up and leave and take a bunch of the company’s hard-won customers or confidential information with them.

The non-compete agreement is supposed to prevent that but sometimes the agreement has been broadened to a point where it makes it almost impossible for the employee to find work. When working with a company that is at all reasonable, finding a middle ground is may be possible, sometimes with the help of an attorney to assist you. In any case, when trying to get around a non-compete agreement, it is better to be proactive by discussing it with your current or former employer before making a commitment to the new employer. You can also retain an attorney to review the agreement to determine if it is enforceable as sometimes it may be drafted too broadly or there may be a lack of adequate compensation rendering the agreement unenforceable.

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